Thursday, February 29, 2024

The State of the Video Game Industry: A Discussion

Shaking up the Video Games Industry

Recently it was announced that Microsoft will be bringing some of its first-party games to rival platforms. While it is not unheard of (as is the case with the Ori series to the Nintendo Switch), this cracks the door open to a potential new era in the console gaming sphere. But before this, some history.

A little over twenty-two years ago, on November 15, 2001, Microsoft released a new gaming brand; the Xbox. This act reintroduced an American console manufacturer into the fold and brought innovations and new corporate tactics to the console side of the gaming industry for the next two decades. As Sega phased out (their previous two consoles failing to break the ten million mark), a huge shift occurred; Sony, Nintendo, and Microsoft were now the big three. With an American console maker in the mix, the two Japanese giants would make pivots to stay competitive in a market that they’d dominated.

Bill Gates wanted a competitor in a sphere he assumed would compete with the PC industry. With the PS2’s ability to play DVDs and CDs in addition to games, this was perceived as a potential threat and thus a need to enter the arena. While the PS2 handily trounced Microsoft’s first offering and Nintendo’s Gamecube (Playstation 2 sold over triple the amount of its competitor’s combined sales), Sony relied too much on its namesake for their successor and hubris caused a gaping opportunity. This is when Microsoft brought out the big guns.

While Nintendo ended up doing its own thing with the Wii (lower power console for a more casual audience), Xbox and Playstation competed directly for the same audience. This is the generation in which Microsoft introduced the Xbox dashboard, better Xbox Live services, higher visibility of indie games, a great controller, and easily replaceable hard drives. They also highlighted micro-transactions, pointless DLC, a higher focus on timed-exclusive content, and the biggest repair bill that any console manufacturer has had to dole out (thanks Red Ring of Death). Despite Xbox 360’s shortcomings, Sony priced their PS3 at $600 and launched a year later. Their online tech was miles behind (though free), and their messaging equated to: “If you can’t afford it, get a second job.” It took Sony years to recover from their mistakes and eventually overtake the 360, but in turn, they learned a very important lesson; exploit your opponent’s weakness and hammer away when the opportunity presents itself.

Microsoft’s launch of the Xbox One (their third console, not to be confused with the original, simply named Xbox) was a mess. Their messaging confused fans and casuals. The inclusion of Kinect frustrated those who didn’t want it, the console requiring a constant internet connection angered those with poor or no connectivity, the focus on digital-only games left physical lovers in the dust, and to top it all off, the console was weaker, yet more expensive than it’s competitor; the PS4. The Xbox One was ahead of its time. This singular major Microsoft error set Sony up for success throughout the entire generation, which bled into the current one with the PS5. Sony deployed the same tactics Microsoft used in the previous generation; timed exclusives, full exclusive content, procuring franchises synonymous with the other platform, keeping certain characters exclusive to their platform, using their leading position to make better deals, etc.

Though Microsoft has put out some decent games these past few generations, they couldn’t match Sony or Nintendo in the breadth of titles that were either high quality or could sell on name recognition alone. Their Forza games have been a highlight, but their bread and butter, Halo and Gears, dropped from “legendary” status to “great”. In the case of Fable, it disappeared completely (though there is a new one in development). While they’ve released some fantastic indie games, nothing has propelled the Xbox brand to reach the same heights that they had in the 360 generation. So, Microsoft decided to buy a bunch of developers. Then they did the unthinkable in the console space; they bought entire publishers.

With Bethesda and Activision (and let’s not forget Obsidian, Mojang, and inXile) under their umbrella, Microsoft was sure to take the top spot, put their main competitor out of business (or at least demote them to third place), and begin to take control of the console narrative once again as they did in the glory days of the 360. But something happened. Despite all the acquisitions and even an entire exclusive Bethesda title (Starfield), GamePass subscriber numbers haven’t increased and Microsoft has decided to shift tactics. Recent rumors stated that the heads of Microsoft want ubiquity, no more console squabbling. Every screen is now an Xbox. The internet went wild with speculation. Which games would come to rival consoles? What was the point of owning an Xbox if there were no more true exclusives? Will there be another Xbox console?

Unfortunately, the messaging from Phil Spencer and company wasn't entirely clear. What we do know is that Microsoft will be dipping its toes further into the waters of third-party publishing (on PS5 and Switch) with four titles. Microsoft says that Pentiment (Obsidian), Hi-Fi Rush (Tango), Sea of Thieves (Rare), and Grounded (Obsidian) will be the first four titles to have the honor of building the bridge between Sony and Microsoft. While all four will be coming to PlayStation platforms, only Pentiment and Hi-Fi Rush will release on Switch.

With this bit of history and current information in mind, I’d like to ask G, being an Xbox owner, what his thoughts are on the matter. While it may make sense for Microsoft as a whole in the long run, is this a good idea for the Xbox brand or does it weaken its value?

G - I’ll be honest, I thought Microsoft was going to bring Gamepass to the PlayStation and thus end The Console Wars. I was convinced that Microsoft didn’t really want to be selling consoles anymore, but did want to be the Netflix of the coming age of video game streaming. What better way to do that than to first become the biggest and best provider of subscription content and then to offer it on all platforms?

That didn’t happen, of course. Instead we found out that some Xbox-exclusive titles would eventually come to the PS5. Which…doesn’t really move the needle for anyone. But I think it does point to a structural problem in gaming: namely, that The Console Wars are a relic of a lost age and don’t really make any sense for anyone anymore, but Microsoft and Sony are still stuck in the trenches because they are too heavily invested to pivot.

I want to explore that idea in a bit more depth - and get your extended thoughts. Here are mine:

So I’ve been on Team Xbox since around 2002. I had a PS2 already but got an Xbox so I could play Halo and the Splinter Cell games, which at the time were Xbox exclusives. When it came time to upgrade to the next generation, I went with the Xbox 360. It felt like a no-brainer - at that point Xbox Live was lightyears ahead of the PlayStation Network. If you wanted to play online with your friends, Xbox Live delivered a streamlined experience that Sony just couldn’t match. And, like a lot of others at the time, I got hooked on Call of Duty’s competitive multiplayer.

Of course Sony caught up, so when the Xbox One squared up against the PS4 Microsoft needed a new selling point. The Kinect was the gimmick, but really they wanted to sell the Xbox One as a media platform - the centerpiece of your entertainment system. This was around the time that streaming began to replace cable in earnest. The problem, of course, was that Apple, Roku and others were developing devices that could do this just as well, but were much smaller. And that’s even before Smart TVs hit the market. Now you don’t even need a device.

Microsoft’s pivot to streaming turned out to be both a dead-end and a distraction. As you say, the Xbox One just didn’t have the exclusives that powered the Xbox and 360. Sony, meanwhile, had decided to focus on games, bringing a diverse array of critically-acclaimed exclusives to the market that Microsoft failed to match. Turns out people buy consoles to play games - and that’s why the PS4 outsold the Xbox One by more than 2-to-1.

Fast-forward to the current generation. I debated getting a PS5 instead of a Series X, but it wasn’t easy to find either at launch. Eventually I managed to find a Series X bundled with Gamepass Ultimate so I went with that. It wasn’t intentional, though I’ve enjoyed the Series X and Gamepass quite a bit.

What I learned, though, is that Gamepass is more or less all that’s on offer. Despite all those big acquisitions, there aren’t many exclusives to speak of, and the ones that exist have been underwhelming (Halo: Infinite was a massive disappointment). Microsoft wants you to pivot to streaming - and the recurring revenues that a subscription model provides. And like with online play and video streaming, they have correctly identified the next big thing. But as with Netflix, there’s going to be a lot more competition soon too. And that doesn’t just mean fighting for customers’ subscription dollars; it also means fighting rival streaming platforms for content.

That said, Sony has also been struggling. The PS5 may be outselling the Series X/S, but Sony has overinvested in VR and spent a ton of money trying to get another Destiny on the market - and, in the process, lost focus on the exclusive single-player games that helped it win the last round of The Console Wars. This is partly because budgets for triple-A titles have ballooned, reducing their ROI - but it’s also partly because big corporations can be really dumb (and often are).

So here we are, at a crossroads where both companies seem a bit lost. Microsoft, for the 2nd generation running, is trying to find its killer app when we all know the killer app is releasing top-flight games. Sony, meanwhile, should know it needs to focus on games but those games aren’t as profitable as they used to be. Does anyone really benefit from The Console Wars anymore? And what does a viable alternative look like?

Joe D - It’s funny, I completely forgot about the whole multimedia approach that Microsoft tried to sell at the Xbox One reveal. It may have been the single most detrimental aspect of the showcase. While I never ended up getting an Xbox One—I had three 360s die on me and was hesitant to invest—I heard the television integration was well implemented. As I said, I think they were way ahead of the times with their focus. It may have gone differently if they focused as much on the games.

Getting back to the question, I do believe the consumers benefit from competition, but not the Console War itself. It has grown from a simple rivalry (from the Nintendo/Sega/PlayStation days) to a vitriolic cesspool. Console zealots now send death threats to developers and tear to shreds all who criticize their beloved. God forbid you want to make a post on social media criticizing a company you support (as I have tried to with some of Sony’s poorer choices), the rabid dogs find their way to you immediately. But outside of the crazy hecklers, the competition between the companies has forced innovation in the video game industry. Let’s go back to the 360/PS3 competition. Sony was so comfortable resting on their laurels at the end of the Playstation 2 generation that they didn’t think they needed to compete. With more third-party companies supporting Xbox, Microsoft’s pressure forced them to rely on their first party a whole lot more than ever before. During the PS3 era, Sony was much more daring than today. We got the Resistance 1, 2, & 3, Infamous 1 & 2, Uncharted 1, 2, & 3, The Last of Us, Killzone 2 & 3, LittleBigPlanet 1 & 2, and so many more. On the reverse, PS2’s success made Microsoft come out of the gates early and set the precedent for online reliability and services for not only that gen but the future of gaming on consoles. Sony’s insistence on BluRay made Microsoft do the same (Yay, no more disc swapping). Nintendo meanwhile just does unique things that Sony or Microsoft try to piggyback off of (motion controls anyone?). Once Nintendo began to do their own thing with the Wii, it became a two-horse race between Sony and Microsoft.

(List of Sony Published PS3 Games)

I think the reason the rivalry has gone on so long is because, as you said, both companies are entrenched. Sony even more so due to PlayStation’s importance to it, with PS accounting for a third of its revenue. This next part is speculation, but I believe Microsoft allowed the Xbox division to do their thing, to make Xbox the number one place to play, and the guys at the Xbox division were like rich kids at a playground trying to one-up their opponent. As recently as 2019, they spoke about how they were in a position to “spend Sony out of business.” After failing to get out of third place three generations in a row, and more importantly, after the massive acquisitions they made (Bethesda for $7.5 billion, Activision for $69 billion), the higher-ups at Microsoft decided it was time to recoup their investment and come up with a new strategy.

I agree with you that Sony seems a bit lost. I don’t know of any first-party games planned for this year (a first in a very long time), and that’s rather disappointing as I love a majority of their studios. I revere The Last of Us and thought that the Part 1 remake was brilliantly done, but if Naughty Dog releases one more remaster or remake of that series before another new game, I will lose my mind. Tying into what you said about Sony trying to create another Destiny, Naughty Dog’s live-service game was canceled because the studio was going to have to choose between being a live-service studio or a single-player game studio. I was rather disappointed because I enjoyed the Factions multiplayer, but I would prefer their single-player focus. That said, forcing studios that don’t traditionally make live-service games into live-service studios is an odd choice, especially considering people have come to PlayStation for their prestigious single-player experiences. Hopefully, their current success with Helldivers 2 will make them realize they could outsource to second parties for that sort of thing (or purchase a multiplayer dev).

There is something that worries me though. If Microsoft exits stage left, will Sony continue to produce as much excellent content, knowing that no competitor is trying to usurp their market share? Sony was misleading with their “We believe in generations” message at the beginning of this generation, but they have consistently released at least one or two Game of the Year contenders every year since 2015 despite being far ahead of their prime competitor. What will happen if Microsoft pulls out of the console space and simply goes full streaming? Will Sony keep their service as well, or will it let it die off since they own the hardware front? Their PlayStation Plus upper tiers have become much better in response to Microsoft, but it’s not their priority.

I fear that video games will go full streaming service and it affects the quality of the games. While we may get some decent AA games, AAA games will become a relic of the past. As much as I love my Netflix shows, I won’t find a movie with Avengers: Infinity War’s budget as a day and date release. I think Sony may go on for a while longer with consoles while Microsoft becomes more ubiquitous with GamePass. If every game has to eventually launch on a streaming service on release day, as Microsoft says they want to do, how do you think that affects the game industry and the games themselves? While I agree both streaming services are great for consumers, do you think it will be good for devs in the long run? Could it affect creativity in the AAA and AA space?

G - I’ll never understand why some fans think aligning with one massive corporation over another is an important moral choice. Just make the best choice for you and be happy with that choice - why does it matter what anyone else prefers? But everything is zero sum these days, no matter how mundane or, ultimately, inconsequential the battle is.

But anyways, back to the topic at hand…at this point I don’t think we have to worry about Microsoft abandoning the Xbox, at least not for a few years. But I also don’t think The Console Wars, as currently structured, really benefit either Microsoft or Sony. Sure, PlayStation revenues are higher, but the Xbox platform appears to be more profitable; as a percentage of revenues, Microsoft’s margin is almost double Sony’s. So there is something for each company’s Board to be unhappy about.

Also worth noting that Nintendo’s profit margins are the highest of all, and by a long-shot. This is a direct result of Nintendo’s decision to opt out of The Console Wars. They’ve had their ups and downs, but scored a hit with the portable Nintendo Switch - which is now the 3rd best-selling console of all-time. How did they do it? They stopped trying to keep up on hardware tech specs and instead focused on making high-quality first-party games and then making them fun (and convenient) to play.

I don’t know if either Sony or Microsoft can emulate Nintendo’s model, the same way Dell or Lenovo can’t really emulate Apple’s. But it’s time for a rethink - and that’s why it seemed plausible that Microsoft would start to offer Gamepass available on the PlayStation. They aren’t doing it, apparently, but would it really be a bad idea?

I agree that we don’t want a situation where only Sony makes a console for triple-A games, and recent layoffs suggest that’s not even a great bet right now. But maybe there are alternatives! Maybe what we really need to see is Microsoft and Sony strike a partnership where they both keep making consoles, but those consoles are compatible with each other. You would need a standard OS but each could have a custom build of that OS. Both could then focus on delivering games - and their streaming services, as I’m 100% convinced this is where the market is heading. Thoughts?

Joe D - You’re right about Sony’s current model being unsustainable, the profits get smaller while game costs continue to rise. More info will come from the recent layoffs, though it seems to me to be a restructuring of how they manage their studios. With Jim Ryan on the out, maybe the company will go back to focusing on single player games, or at least that's what they say. When it comes to hardware, I doubt that Sony gives Microsoft any leeway in the console space. If Microsoft backs out of making consoles, then maybe Sony will take a Nintendo approach and make their games with a lower budget. I think that having a dedicated gaming system could eventually become obsolete, with people streaming from their television, computer, or some kind of attachment (like an Amazon Fire Stick). Who knows, maybe the Amazon Fire Stick will eventually provide both PlayStation Plus and Game Pass on it within ten years. If it comes down to competing streaming services, Microsoft is well-positioned to demolish any competitor.

I think the situation could be this: Nintendo makes the casual console, Sony makes the high-spec console, and Microsoft tries to proliferate through using Game Pass. If Microsoft gets rid of the need to spend as much on competing consoles, they could use that money to grow the Game Pass library and put it on PlayStation and Switch. When the streaming service space expands, they’ll have more leverage to force Sony to innovate.

Eventually, I see the space becoming a place where Microsoft and Sony simply have timed-exclusive content on each platform (like Netflix and Hulu), with exclusive content that they make in-house. It’s kind of like it is now, but you won’t own any of the content unless you decide to buy it, and even then it will be digital so you’ll only own the license, not the game itself. So long as Microsoft produces a console, I’m not sure when Game Pass would come to PlayStation, as it would make their console obsolete. The only reason to get an Xbox would be because you like their OS, but I doubt that would be a high consumer motivator in the console space. I think that by publishing these four games on PlayStation, Microsoft is testing the third-party waters and it will eventually lead to their exit from the console space (possibly after the next generation). 

Though this is an inconclusive viewpoint, I think it could have both positive and negative effects on the industry. While we already discussed the negatives, the positives would allow Microsoft to play to its strengths and get on more screens, and it would allow Sony to back off on spending so much on their games since their main competitor is out of the race, giving them more profitability and the ability to create more first-party content. I can’t be sure how this is going to change the industry, but I’m sure it will have a profound effect in the upcoming years. I’ll keep my fingers crossed that whatever happens, I’ll always have a way to own my media.